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Airline Business Competitive Environment The Airline Industry is a service industry but due to all the equipment and facilities involved in transportation, it is easy to lose sight of that fact. The industry provides its customers with quick and convenient travel that other industries such as trains, busing service, and car travel cannot provide. It is an undisputed fact that there is no viable alternative to air travel over long distances, such as international travel. The service of the airline is rather simple and familiar to everyone transporting people and their personal belongings, plus cargo shipments for different enterprises, businesses, and federal institutions.
The goal is to deliver an affordable service, which will satisfy the clients, and at the same time retain some revenue. There are several types of airlines, defined by the type of service they offer, annual revenues and the type of aircraft they use. All federal safety requirements are pegged to aircraft size. Major Airlines are earning revenues of $ 1 billion or more annually in scheduled service. They generally provide nationwide and in some cases worldwide service. National carriers are scheduled airlines with annual revenues between $ 100 million and $ 1 billion.
Many of the airlines in this category serve particular regions of the country, although some provide long haul and even international trade. Regionals, as their name implies, are airlines whose service is limited to a single region of the country, transporting travelers between the major cities of their region and smaller, surrounding communities (Air Transport Website). With greater competition on the vast majority of routes, extensive discounting, and more available flights, air travel has grown rapidly since deregulation, recessionary periods excluded. In 1977, the last full year of government regulation of the airline industry, U. S. airlines carried 240 million passengers.
By 1993 they were carrying nearly 490 million. A Gallup survey that same year revealed that 77 % of the U. S. adult population had flown at least once, more than 30 % of them in the past 12 months (Air Transport Website).
The price competition since airline industry was deregulated became very intense, and the result of it three has appeared a number of new carriers, which focus on regional operations and no-frills services. These carriers usually utilize older airplanes and tend to work outside the industry-wide automated reservations systems. In exchange for these inconveniences, that are sometimes just immaterial to rural flyer, passengers are proposed low fares relative to the industry as a whole. Generally, the Airline Industry has razor thin profits, even in the best of times. Airlines through the years have earned a net profit between one and two percent compared to an average of five percent for U. S.
industry as a whole (Air Transport Website). To travelers, the cost of tickets sometimes look high compared with the amount of money they spend on other goods and services. However, the cost of providing the transportation service they are getting is almost as high as the price they are paying. For the airlines, earning enough profit to satisfy stockholders and invest in the equipment and facilities needed for the future is a real challenge. Until late 1978, when air tariffs were regulated and set by the government, meaning that price was not the only factor affecting the competition. Rather, airlines were competing on service and associated image.
Giants (among which are present even today companies like American, United, TWA) dominated the airline industry. These mega-corporations usually served international directions as well as some of the national flights. And the rest of the market was divided among national and regional airlines, such as Southwest, which began its activity by providing short trips between airports not served by the alike to the aforementioned. Deregulation of the airline industry, which started in 1978, introduced a new condition in which even very small national and regional carriers suddenly could compete in a free market alike environment. Many changes occurred. The management of the companies reviewed its rate schedules, the prices became flexible and quite different from carrier to carrier on the same route.
The only limitation to the development of the airline business was the lack of airport capacity to accommodate all airline companies. The wealthier companies could purchase virtually unlimited number of exit gates throughout American airports. Companies such as Southwest acknowledged the prospective for low fares, and began developing a particular market segment for themselves by providing a decent service at surprisingly low fares (FAA Forecast). The success of Southwest Airlines inspired a new generation of low fare air carriers, with Valu Jet (economic class airline aimed at middle and low earning population of the United States) beginning its operations in the early 1990 s. However Federal Aviation Administrations review of the low fare airlines in the United States in the middle of 90 s has shown that though all of them comply with aircraft standards, many lack proper training of their pilots.
Thus the internal competition has been affected by the governmental factor, and many global airlines acquired the percentage of the national market (FAA Forecast). The competitive environment within the airline industry is strengthened even more by seasonality of the business. The summer months are extremely busy as many people take vacations at that time of the year. Winter, on the other hand is slow, with the exception of the Christmas holidays.
The result of such peaks and valleys in travel patterns is that airline revenue also rises and falls significantly through the course of the year. Usually during the unseasonable periods airlines perform their maintenance's, while the top managers develops new ideas for the upcoming season (Jenkins). Industry observers believe U. S. air travel market is indeed maturing, and most future growth for the industry will occur in international markets.
General trends in the U. S. air transport industry included airline deregulation, mergers of airlines, and fluctuating airfares and so-called price wars. As a result of the 1978 law deregulating the air transport industry in the United States, many airlines dropped less profitable service to smaller cities and competed intensely in high-density passenger markets. International travel has tremendous growth potential, and large, double-deck aircraft with a seating capacity for 800 to 1, 000 passengers would fit well with the that trend. To accommodate the larger, double-decker jets mentioned above, airports in the future will need longer runways, larger gate areas, and larger terminals.
Today the airports used by the scheduled air carriers are virtually all public facilities run by an agency of a state or local government for example, a state department of transportation, or a commission or port authority established by the state legislature and run by a board of directors appointed by elected officials (Jenkins). This means that in the nearest future, in case of tangible growth of international directions, the substantial investments will be required by the industry. As the result the airline company, which is able to invest money today into the airport infrastructure will gain a good head start in tomorrows business. International markets hold the greatest potential for growth, in part because of the expansion of world trade and the rapid economic growth occurring in many foreign countries, in part because more and more people have the time and money needed for international travel and relatively few people have visited other countries. Besides, the globalization and growing intercultural exchange between the nations adds evidence for this assumption. Another important development, which was aimed by the largest companies at obtaining some competitive edge, following governmental deregulation, was the advent of computer reservation systems (Cross).
These systems help airlines and travel agents keep track of fare and service changes, which occur much more rapidly today than they did when the government controlled such things. The systems also enable airlines and travel agents to efficiently process the millions of passengers who fly each day. Computer reservation systems spurred the development of code sharing agreements in the mid 1980 s between the major airlines and smaller, regional airlines. The agreements allow the small carriers to share the two-letter code used to identify their larger partners in the Cross. Their flights then are displayed as "through" flights rather than connecting flights, which appear lower in the computer listings (Aarons). The development of computer technologies in the airline business allows the companies to be more flexible in todays market.
Now any decision made by the executive board of the airline can be instantly applied in any location. This provides for prompt updates to the strategic and annual plans of the companies, and on-line correction of business management. However, as any other service business the airline industry's success is based on the growing sales of their flights. Therefore, without proper marketing the company cannot sell its services and be competitive. The above-mentioned deregulation sparked marketing innovations that equate to fare discounts, the most noteworthy being frequent-flyer programs which reward repeat customers with free tickets and other benefits. Most major airlines have such a program, and many small carriers have tie-ins to those programs.
While the programs vary, the essential elements are the same. Once a customer enrolls, he or she is credited with points for every mile flown with the sponsoring carrier or with other airlines tied into the sponsor's program. The rewards (free tickets and upgrades that convert coach tickets to first class or business class tickets) are pegged to certain point totals. A more recent development has been the marriage of frequent-flyer programs with promotions in other industries, the credit card industry in particular. It is now possible to build up frequent-flyer points by purchasing things other than airline tickets, and in some cases to exchange miles for other goods and services, like hotel rooms. The loyalty program of global airline alliance Star Alliance called Miles & More is particularly popular among European businessmen.
One of the partners in Miles & More is Hilton hotel, which also operates globally, and provides bonus accommodation to all participants of the program. Nevertheless, Sales and Marketing also encompasses such activities as pricing, scheduling, advertising, ticket and cargo sales, reservations, and customer service, including food service. While all of them are important, pricing and scheduling in particular can make or break an airline, and both have become more complicated since deregulation. Airline prices change daily in response to supply and demand and to changes in the prices of competitors. Schedules change less often, but far more often than they used to when the government regulated the industry. As stated above, airlines use sophisticated computer reservation systems to advertise their own fares and schedules to travel agents and to keep track of the fares and schedules of competitors.
Travel agents, who sell approximately 85 % of all airline tickets, use the same systems to book reservations and print tickets for travelers (Jenkins). Another factor that influences successful competitive position of the airline company is its cost and revenue structure. The more it is optimized, the more competitive the company is. Airlines require a colossal range of costly equipment and facilities, beginning with modern airplanes and ending with sophisticated training devices, like 3 D flight simulators. The business is very capital-intensive, meaning that a lot of money is necessary not only to get started but also to maintain a constant level of operations. The necessity to replace quickly depreciating equipment requires the companies to remain financially stable and solvent.
About 90 % of the U. S. airline industry's revenue comes from passengers and 10 % from cargo shippers, the biggest of which is the U. S. Postal Service (Air Transport Website).
For the all-cargo carriers, of course, cargo is the sole source of revenue. For the major passenger airlines, which also carry cargo in the bellies of their planes, less than 10 % of revenue comes from cargo (in many cases far less). Most of the passenger revenue (about 75 %) comes from domestic travel, while 25 % comes from travel to and from destinations in other countries (Air Transport Website). More than 90 % of the tickets sold by U. S.
airlines are discounted to some extent, with discounts averaging two-thirds off full fare. Fewer than 10 % ever pay full fare, most of them last minute business travelers (Jenkins). The majority of business travelers receive some discount when they travel. A relatively small group of travelers (the frequent flyers who take more than 10 trips a year) account for a significant portion of air travel. While these flyers represent only 8 % of the total number of passengers flying in a given year, they make about 45 % of the trips. They are the prize customers (Jenkins).
More than 85 % of the industry's tickets are sold by travel agents, most of whom use airline-owned computer reservation systems to keep track of schedules and fares, to book reservations, and to print tickets for customers (Air Line Website). Agents cooperate with the airlines on agential conditions, meaning they receive the percentage of the price of a ticket sold. There are more than 30, 000 travel agents only in the United States. The agencies are providing and supporting a vast network of retail outlets for air transportation that would be enormously expensive for the airlines to duplicate on their own. Likewise, freight dealers and companies book the largest amount of air cargo space. Similarly to travel agents, freight-delivering companies are an autonomous sales force for airline services, in their case working for shippers.
Some analysts have predicted that the revolution occurring in telecommunications will shrink the business travel market and leave airlines more and more dependent on low-paying leisure travelers. Fax machines, E-mail, video phones, and especially teleconferencing make it possible to avoid travel and conduct more business long distance. None of these electronic gadgets, however, can facilitate a lunch or dinner with an important client, or a trouble-shooting tour of a factory that has problems meeting its production quotas. Business men and women still will find plenty of reasons to travel, maybe even more so as companies "go global, buying, selling, and producing their products all over the world. The key to hanging on to the business customer is price. As long as airfares are low enough, business travel will flourish.
It may even reach new heights. Therefore the rivalry among competing sellers has to be strong. Competition is focused on price, customer service, and financial stability. The market attempts of companies in other industries to win customers over to another industry is not as likely as to win them over to another airline. The airline industry is very exposed to the external factors of social life when dealing with the demands of the people, and their willingness to use flight services. One of the latest examples is the hijacking of two planes on the 11 th of September in 2001.
Such incidents have a great impact on the components of the external business environment, which are economy, technology, sociocultural, and political or legal aspects. Besides the economy has been in a period of a recession since the September 11 th attacks. The economy is suffering due to the lack of consumer spending. People have the money to buy, but they are not willing to buy right now. The travel industry took a big loss since the attacks. Consumers are not willing to travel by plane as much as before.
The government had to step up to maintain the survival of the airline industry, so Congress passed an aid package. American Airlines received about 900 million in cash from the government. American still has to keep up with their technology to survive this crisis. Its technology such as airplanes, repair tools, computers, and the knowledge of the mechanics, ticket registrars, and flight crews helps facilitate the transporting of people from one place to another. However, even despite many difficulties and obstacles, airline business is still very attractive to investors and new companies.
Still, the potential entry of new competitors is low due to several factors. The airline industry, due to its nature, requires large economy of scale, large cost of start-up, and it is extremely risky. New entrants face obstacles such as experience and know-how of employees, state-of-the-art technology, favorable locations, and lower borrowing costs that existing airlines are privy to. Other obstacles are regulatory policies, taxes and bargaining power and leverage of suppliers of inputs who supply the existing major airlines. Major airlines have more leverage with sellers than smaller airlines or new entrants with less leveraging power. Therefore it is very unlikely that some new airline will appear in the nearest future.
Rather, in the next years the passengers will be offered new types of services at the new prices. And the competition in the airline industry will be getting only tougher. Bibliography: Aarons, R. N. (1991). Coming to grips with automation. Business & Commercial Aviation. 112.
Air Line. Airlines Serving Bandaranaike International Airport. Retrieved Nov. 25, 2003. Web site: web Air Transport Website. Brief History of Aviation.
Retrieved Nov. 25, 2003. Web site: web transport. org / public /publications / display 1. asp FAA Aviation Forecasts. (1978).
Washington, DC: U. S. Department of Transportation, Federal Aviation Administration. Jenkins, Darryl. (Ed). (1995). Handbook of Airline Economics. Washington, DC: Aviation Week Group of McGraw Hill.
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Research essay sample on Airline Business Competitive Environment
